Look for European Hotel Dealmaking to Pick Up Later in 2023

Andreas Scriven is the lead partner for the hospitality and leisure practice at Deloitte UK and Deloitte NS Europe. Scriven has an interesting perspective on European hotel deals and development.

• In Western Europe, Deloitte has had its fingerprints on every large hospitality asset transaction on the buy or sell side in the past several years.

• The firm advises on tax and auditing issues, offers valuations and brokerage services, supports transactions with new tools like geospatial analytics, and provides strategic advice for operators and investors.

I spoke with Scriven on Friday to get a pulse check on the sector. We discussed:

• The 2023 outlook for Europe.

• What he thinks it will take to thaw the market for hotel asset sales.

• Why the big players likely won’t increase the pace of consolidation this year.

• Why Amsterdam is a favorite city among hotel investors right now.

• Where he thinks hotel development is especially innovative right now. Hint: look to the Middle East or startups.

Hotel deals and development in Europe have been mostly frozen for many months. As for the 2023 outlook, Scriven places himself somewhere between optimistic and pessimistic.

He points to how European airports and airlines have said they anticipate record flight volume this summer.

• Consumer sentiment and spending surveys suggest that, while the cost-of-living crisis is straining consumers, spending on discretionary categories like travel is disproportionately holding up.

• “But at the same time, hotel operators are seeing some pretty serious cost pressures that won’t magically reverse in short order,” Scriven said.

Unrealistic expectations on asset prices from hotel sellers are holding up the deal flow.

• “There are a lot of investors who would like to get into the market,” Scriven said. “But we’ve seen a number of deals stall in the UK and across Europe — both portfolio and single asset. The issue has because there’s a gap between what buyers and sellers think is realistic for pricing.”

• “Sellers haven’t had to adjust their pricing expectations at any stage over the last four years or so.”

Distressed asset sales, mostly absent in the past four years, may reappear.

• Inflationary utility costs may push some hotels to the brink, prompting owners to come down on asset prices and close deals.

• Some hotel businesses that used their cash reserves to come out of the pandemic and pay for property upkeep or renovations are now being hit with rising prices for energy, food and beverage, and (in some markets) labor.

• This may cause distress and lead to sales, such as Davidson Kempner Capital Management’s acquisition of 23 hotels in Portugal valued at 850 million euros from seller ECS Sociedade Gestora de Fundos de Capital de Risco late last year.

• “I’ve chatted with a few private equity owners and investors recently, and they said that, if you look at the increase in energy prices, it’s eroding — depending on the portfolio and the type of assets — somewhere between 25 and 40 percent of EBIT [earnings before interest and taxes],” Scriven said.

• Some hoteliers may not have enough earnings headroom built into their business models to manage extra cost pressure or fade in demand.

• “If you’ve got any covenant tests in your loan documentation, suddenly you could find yourself in quite a difficult situation pretty quickly,” Scriven said.

• “However, you never know where the market adjustments will come from until they actually happen,” Scriven said.

Some investors in hotels may also be prompted to sell for external factors.

• “If you look at some of the funds that invest in hospitality, they obviously are at the end of the lives of those funds,” Scriven said. “They’ll be obligated to transact — to accept the prices in the market.”

Scriven is eyeing the types of targets that large acquirers might likely consider for consolidation in Europe. But he doesn’t see the post-pandemic era as speeding up the pace of consolidation.

• “We’ve been regularly approached to advise some of the big players around what portfolios they could buy where they can either take just the brands in terms of franchise play or an HMA [hotel management agreement] play,” Scriven said.

• “There are some regional chains, ranging from budget to luxury, that could be really interesting,” Scriven said.

• “If you look at the budget sector, you could make a case for a Motel One, a CitizenM, or even a Premier Inn, as being in play,” Scriven said. “One of the big U.S. operators who doesn’t have a budget exposure in Europe should double down on something like that.”

• But there will be a lot of friction to getting deals done this year.

• “Consolidation will continue, but probably not at a dramatically faster pace,” Scriven said. “The opportunities for big plays are somewhat limited.”

Deloitte recently released its latest European Hospitality Industry survey and update. Amsterdam was the most popular city as an investment target. It has retained a top spot in popularity among investors in several years of surveys. Why?

• “I would hasten to add that that’s not the Deloitte opinion, that’s the opinion of the people we surveyed,” Scriven said. “I potentially would not have put it on the top of my list if me, personally, was looking at it from an investment standpoint.”

• “What people like about it is that it enjoys a mix between strong corporate demand and strong leisure demand,” he said. “It’s got a good mix of facilities.”

• “Historically, it’s had good connectivity through Schiphol,” Scriven said. “Though the airport has been a bit of a nightmare scenario in recent years, and it probably doesn’t go right at the top of the marketing brochure anymore.”

• “From a supply perspective, obviously there was a kind of a development moratorium in place. so if you could actually get into the market by buying an existing asset, you felt that there were barriers to entry that would support the value of your asset,” Scriven said.

Brexit doesn’t appear to hold back investor interest in the UK’s hotel market.

• “Brexit is a topic,” Scriven said. “But I don’t think it’s a dominant topic or something that in a binary way would shape investment decisions.”

• “In certain markets in the UK, where there was already pressure in labor from a cost perspective, Brexit is taking an element of that workforce out and — generally speaking, when I talk with operators — that has not been viewed as hugely helpful,” Scriven said.

If you’re looking for innovation in the hospitality sector, you may find more of it in the Middle East than in Europe.

• To an extent, Scriven is “talking his book.” Deloitte does a lot of work, for example, in Saudi Arabia for the Neom project from a tourism development perspective and on some of Saudi’s other giga-projects.

• But he makes a plausible point about how Saudi can start from a clean slate.

• “When you’re constructing a destination, you have a blank canvas so you can follow best practices from the start, letting them take a quantum leap forward from other players stuck with legacy technology and practices,” Scriven said.

The hotel sector’s competitive weak spot is technology.

• “A lot of hotels can’t even answer a simple question, like, ‘why is a particular guest traveling?'” Scriven said. “As a guest, I might buy something totally different as an upsell when I’m traveling with my nine-year-old daughter than when I’m traveling on business, and so on. But a hotel can’t increase its share of wallet by selling an experience or ancillary if they can’t identify their customers or know the ideal time to sell to them.”

• “I was chatting to somebody at an executive level at one of the major hotel companies a few years ago, and he had come from a different industry and he had all these ideas of what he wanted to do around engagement with customers and so on,” Scriven said. “He basically said he was hamstrung because he was dealing with systems that in essence were 30 years old and all held together by sticky tape, right?”

• Hotel companies have always consciously struggled to justify making the necessary investments in the hundreds of millions to get their tech stacks fit for purpose and cloud-based,” Scriven said. “Some of the big operators who have gone through data projects have found them really, really challenging.”

• “So I think some of the nimbler startups or smaller portfolios who can take technology that is not proprietary or has limited proprietary aspects to it and that is fully cloud-based and scalable are in a much better place than some of the the big players,” Scriven said.

If Scriven’s right — and I suspect he is — many hotel assets are trading today at prices that will look too high years from now, while other assets will prove to have been undervalued. In the meantime, big money sits on the sidelines.